Scylla and Charybdis in Business

When you create your company budget for the year, what is it costing you? I don’t mean in terms of staff time and meetings, but in terms of lost opportunities?

The news the last few days hasn’t been good for a few major companies. Biomedical company Theranos is now the subject of a criminal investigation by Federal Prosecutors who are investigating whether the firm lied to investors and others about its operations and technology.  The troubled former tech giant Yahoo! is shopping around for someone willing to buy the ailing company, and legendary computer chip maker Intel just announced it is slashing 12,000 jobs in an effort to become “…a more productive company with broader reach and sharper execution,” according to CEO Brian Krzanich. Ouch.

What can explain these colossal failures, and is there anything that can be done to avoid them yourself? According to BCG’s Knut Haanaes, these are examples of a failure to balance between exploration and exploitation in business.

Theranos seems to fall squarely into the too much exploration camp. It was attempting to do things that had never been done before, with seemingly miraculous technology that had venture capitalists and other investors shoving money into it hand over fist. But as anyone who even had grade-school level history knows, exploration is a risky business. Just ask English mountaineer George Mallory, who died in a desperate attempt to reach the summit of Mount Everest in June of 1924. Trying to do too much too fast is self-defeating, as many changes require time to be able to evaluate whether they are working or not. Not to mention, your business will not appear to know what it’s doing if it’s constantly changing directions; even in today’s world you do need some grounding.

Yahoo! and Intel, on the other hand, seem to fall squarely into the too much exploitation camp. While Yahoo! used to provide internet services comparable to other major browsers and platforms when I was a kid (I spent many an hour in Yahoo! chat rooms or on Instant Messenger with friends from school), they seemed to lose interest in keeping up with the massive changes in the internet and its use as I entered high school and college. And Intel? It’s still the major manufacturer of computer processing chips…at a time when PC sales are falling, everything is moving to the cloud and PC’s aren’t a requirement anymore.

I see a lot of companies who fall pretty hard on the exploitation side of things. If they’ve found a winning formula that has kept them in business for twenty or more years, why change what isn’t broken? Well, as Haanaes points out (and as any good historian can tell you), in the short term being risk averse is often a benefit; but in the long term it becomes riskier to your survival than the risks you could have taken in the shorter term. A disturbing visual of this comes from the graph he used in the presentation. When companies take a one year look at operations and performance, only 32% of the resources go towards innovation. Yikes! Numbers like this might have been just fine decades ago, before technology began growing in leaps and when the business world had not yet heard of a VUCA operating environment, but now if you are just keeping pace you are standing still in a fast-moving environment.  And if you are trying to play catch-up…well, it was nice to have known you.

Innovation in Companies

Courtesy Knut Haanaes TED Talk June 2015

So how do you strike a balance between exploration and exploitation and avoid the rocks and whirlpools that will sink your business? Haanaes has some great tips in his TED Talk, but if you need something more practical think about this: When you create your company budget for the year, what is it costing you? I don’t mean in terms of staff time and meetings, but in terms of lost opportunities? Especially in the tech world, if a trend takes off and you can’t devote resources to even looking at it for another year until you can allocate the budget for it, your competitors may well be on the market with the product before you can even get your R&D staff to begin research. Moving to semi-annual or quarterly budgets (or adjustments) might just give you the flexibility you need to be able to take advantage of opportunities as they present themselves, and help you avoid falling into the comfortable trap of too much exploitation.

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